Technical Tuesdays

21 October 2014

Our weekly technical report is compiled by in-house market analyst Shaun Murison

In the report this week we look at the South Africa 40 index, key indicators as well as the following equities:

Pick n Pay Stores Ltd vs Spar Group Ltd

MTN Group Ltd

Tongaat Hulett Ltd

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South Africa 40 index

Technical view

The South Africa 40 cash Index has formed and confirmed a double bottom reversal pattern (blue “W”). Double bottom formations warn of bullish intent after a downtrend.

These patterns highlight the first point at which the price starts to make a series of higher highs following a series of lower highs.

The height of the pattern projected from the breakout level predicts an upside target at 44 000. Should the price close below the 42 000 level the bullish reversal would be considered to have failed.

Source: ProRealTime charts, as of 21/10/2014

Pairs in focus

Pick n Pay Stores Ltd vs Spar Group Ltd

The chart considered is that of Pick n Pay (candlestick) with a Relative Strength Comparison (RSC) indicator added. The RSC (blue line) compares the price of one security with that of another in a ratio format.

The RSC has experienced a decline in value recently which highlights that security 1 (Pick n Pay) has been underperforming security 2 (Spar). Bollinger Bands have been added to the RSC and highlight the underperformance of security 1 reaching abnormality relative to the usual relationship of the two securities.

It is expected that the relationship between the two securities will revert back to normality favouring a possible pair trade opportunity i.e. long Pick n Pay, short Spar. The target from the technical indications would be for the RSC to move back towards the 20MA (red line) which is regarded as the mean. This could occur with the price movements of the securities in a number of ways:

  1. Pick n Pay rising and Spar
  2. Pick n Pay rising faster than Spar
  3. Pick n Pay falling slower than Spar

Should one of these scenarios play out successfully the expectation would be for a net gain of 4.3%. A stop-loss would be considered equal to the anticipated gain of 4.3%.

Source: ProRealTime charts, as of  21/10/2014

Equities in focus

MTN Group Ltd

The price of MTN is currently breaking out of a falling wedge formation. The pattern highlights a slow cumbersome move down after an aggressive move up, alluding to the momentum remaining bullish.

The initial upside wedge resistance at 24 700 is favoured, which if broken further favours a move towards resistance at 25 750. The price closing below support at 23 100 would consider the failure of the bullish indication.

Source: ProRealTime charts, as of  21/10/2014

Tongaat Hulett Ltd

The price of Tongaat Hullet has formed a bullish engulfing (circled black) at the support of the 200 day simple moving average (blue line). Furthermore the reversal is supported by the Stochastic crossing out of oversold territory.

These indications are considered short-term bullish favouring a move towards resistance at 15 300. A price close below the recent low at 13 670 would consider the failure of the above bullish indications.

Source: ProRealTime charts, as of  21/10/2014

Market overview

A Technical Analysis overview of key indicators and sectors with regards to trend, volatility and overbought/oversold conditions.

Click to view this week's market overview

 

 

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